7 Companies Doing Right by Shareholders

Financial metrics can tell you a lot about a company -- but they won't tell you everything. That's why we Fools also care about how management treats its shareholders.

Insider ownership -- what percentage of outstanding stock executives own -- is an important piece to this puzzle. The more shares an executive holds, the greater his or her supposed incentive to do what's best for shareholders.

Return on equity (ROE) -- the proportion of net income returned to shareholders each year -- can also reveal how well management is allocating its capital. Is it distributing profits through dividend payments? Making share buybacks? Investing in new projects or research and development?

Most importantly, do companies with aligned incentives and great ROE actually perform better than others? To help answer this question, I screened for companies that had insider ownership of at least 20%, an ROE north of 15%, and a market cap greater than $1 billion. I've sorted the results below, and included their performance versus the S&P 500 over the last half-decade.

*Capital IQ, a division of Standard & Poor's.

So far, so good
To say that these companies completely trounced the stock market over the last five years would be an understatement. However, this is only a list of seven companies, as opposed to the 58 that my screen returned -- so the sample size is small. Additionally, we can't conclude causation; these companies' phenomenal performance isn't necessarily due to their inside ownership or their allocation of capital. However, we can identify correlation, and that's a great place to start. 

Amazon.com and Google have been criticized -- fairly enough -- for not instituting dividends. Both have huge gobs of cash sitting on their balance sheet with minimal or zero debt. There's an argument that management should be returning that money to shareholders. However, investors in both Google and Amazon certainly can't complain about their return on investment.

What about the dividends?
Out of the seven companies listed above, America Movil, Campbell Soup and Buckle pay dividends -- another characteristic we love to see at The Fool. After all, renowned professor Jeremy Siegel has illustrated that from 1957 to 2003, when reinvesting dividends, the S&P's 100 highest-yielding stocks outperformed the market by an average of 3 percentage points. If you're a long-term investor, that's a pretty significant chunk of change to think about.

Dolby Labs, however, pays no dividend. But all is not lost -- if a company doesn't pay cash back to its shareholders, it can still create value through share buybacks. In late 2009, Dolby announced plans to buy back $250 million of its common stock, in order to combat share dilution.

Oracle does pay a dividend, but its 0.90% yield is nothing to write home about. Still, the company's doing its best to treat shareholders right in other ways. Tech companies are notorious for refusing to pay dividends, since it implies that their high-growth days are over, so I applaud Oracle for even providing a payout in the first place. In addition, Oracle bought back $4 billion worth of shares in 2007, and after the market crashed in 2008, the company announced it would buy back $8 billion more.

The Foolish bottom line
In reality, no company will ever be perfect. It's rare to find management that perfectly allocates capital, pays a great dividend, distributes flawless annual reports, and institutes share buybacks at every possible interval.

However, by starting to look at businesses through a different lens, we can determine which companies are more apt to treat shareholders better. Hopefully, over the long run, that will drive stock prices higher, and put more money in your pocket.

Do the stocks above deserve their spots on the list of shareholder-friendly companies? Sound off in the comments below!